FINANCIAL SYSTEM VULNERABILITY IN THE PRE, DURING AND POST-PANDEMIC PERIOD: INDONESIA EXPERIENCE

• Main Author: Darjana
• Format: Dissertations
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/81319
• Institution: Institut Teknologi Bandung

World economic uncertainty and the COVID-19 pandemic have affected the global financial system, including Indonesia. This research attempts to find integrated (composite) indicators which beneficial to capture financial system vulnerability. The vulnerability index enables authorities to monitor and mitigate systemic risks using the principal component analysis method. Composite indicators can become an early warning system (EWS) detecting possible financial crises. The composite index result shows financial system vulnerabilities increased during the COVID -1 9 pandemic period and continued to increase in the post-pandemic period. Meanwhile, the survey of stakeholder results perceive that the current/post-pandemic financial system condition (2023) is in healthy and better condition than during the pandemic period (2020-2022). Subsequently, the impact evaluation modelling of the COVID-19 pandemic on the domestic financial system utilize s Difference-In-Differences (DID) method. Case studies become a research strategy for regional and national banking credit performance. The result shows the credit performance in total decelerate during pandemic. Likewise, it happened nationally for working capital and investment credit, and regionally for consumption, investment, and SMEs credit in Java. The impact evaluation on credit in the main economic sectors (trade, industry, agriculture, construction) shows significantly influenced by the pandemic in the Java region and nationally, except for the national trade sector. This indicates increased vulnerabilities during the pandemic for total credit performance and several types of credit also credit performance for most main economic sectors. The research also analyses the risk profile and network among institutional sectors in the Indonesian financial system using National Financial Accounts Balance Sheet (NFABS) data. The result shows the financial system become more vulnerable during the COVID-19 pandemic, especially corporations, banking, and government. However, network analysis shows the topology network of the institution al sectors in the financial system remained unchanged. Then conducting the impact analysis using the DID method for all institutional sectors. The result shows all institutions net-worth changed during the pandemic except for corporations and the external sector (ROW). This indicates most institutional sectors in the Indonesian financial system are vulnerable to the impact of the pandemic. Then an impact analysis explores industrial sub-sectors with mixed results. Furthermore, this research explores the macroeconomic and financial linkages among institutional sectors in the financial system, namely the real, fiscal, monetary and the external sector. The result of the linkage analysis shows external sector conditions partly influence the weakening of real sector performance during the pandemic period. In fiscal, government spending has increased to finance the needs for handling COVID -19 and social safety nets by issuing government debt securities. In monetary, there is the increasing growth of money supply in the financial system. Efforts to overcome this condition include proposing a course of actions to deliver credit to sectors that still have potential to grow and considered safe from the pandemic, such as the health and the information & telecommunications sector . The academic contribution is in building a vulnerability composite index, as a supplement to the financial system stability index from central bank of the Republic of Indonesia. Besides, the research equipped with various methods and case studies to analyse the financial system vulnerability in Indonesia. Furthermore, policy makers may benefit from policy recommendations, such as a credit-financing matrix for economic sectors with the potential to grow and are safe from the negative pandemic impact.